Quorum Information Technologies Inc

XTSX:QIS

Earnings Call Transcript

[Operator]

Good day, and thank you for standing by. Welcome to the Quorum Information Technologies Fourth Quarter and Year-end 2024 Results. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Maury Marks, President and CEO. Please go ahead.

[Maury Marks, executive]

Thank you, Victor. Hello, everybody, and thank you for attending Quorum Information Technologies Q4 and Year-end 2024 Results Conference Call and concurrent webcast. Joining me is our Chief Financial Officer, Marilyn Bown.

Quorum offers innovative and robust technology solutions and services to vehicle dealerships and original equipment manufacturers or OEMs across North America. Quorum has a uniquely integrated product suite of 13 essential software solutions that are used in whole or in part by over 1,400 leadership customers across North America. At least 1 of Quorum software solutions is installed in 40% of the franchise automotive dealerships in Canada, offering 13 of the 25 most common categories of software solutions that automotive dealerships utilize. Quorum is well-positioned to develop, partner or acquire products for the remaining 12 categories.

Many of Quorum's customers only leverage 1 solution out of our 13 available solutions. That means Quorum has a $54 million annual SaaS revenue cross-selling opportunity within our existing customer base, which is approximately 2x our 2024 SaaS revenue of $28.8 million. We are very pleased to present to you today our 2024 Q4 and year-end results. As many of you know, Quorum commenced a profitable growth strategy in 2023. And we have delivered material improvements in our adjusted EBITDA and cash EBITDA margins. Our cash EBITDA was $5.5 million in 2024, an increase of 89% over 2023 and our adjusted EBITDA was $8.3 million, an increase of 18% over the prior year.

We've also strengthened our balance sheet through significant repayments on our BDC capital loan facility. In 2024, we paid $5.1 million, reducing the balance from $9.1 million to $4 million at the end of 2024. Our improved profitability has not only allowed us to reduce our debt, but it also positions us to consider future strategic capital allocation opportunities. Marilyn will now review our Q4 and year-end 2024 financial results in more detail and I will follow up with some additional comments. After our prepared remarks, we will open the floor to your questions.

Marilyn, please go ahead.

[Marilyn Bown, executive]

Thank you, Maury. Hello, everybody. Thank you for being here with us today. I would like to remind everyone that certain statements in this presentation are forward-looking in nature. These include statements involving known and unknown risks, uncertainties and other factors outside of management's control that could cause actual results to differ materially from those expressed in the forward-looking statements. Quorum is not assuming responsibility for the accuracy and completeness of the forward-looking statements and does not undertake any obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances.

For additional information on possible risks, please refer to our annual MD&A dated December 31, 2024, on the sedarplus.ca website. As Maury mentioned, throughout 2023 and 2024, Quorum improved its financial position by focusing on profitable growth through cost management and a focus on cross-selling Quorum products to existing customers. The company is no longer reporting rooftop count and reoccurring revenue per rooftop as these metrics became less relevant over time, acquisitions of value-added, but low price point solutions resulted in high rooftop counts and average recurring revenue per rooftop, which was not representative of the underlying customer base. However, for this quarter only, we will disclose our rooftop count which was 1,412, a decrease of 6 rooftops or 0.004% from Q3 2024.

We are also introducing a new financial metric, cash EBITDA, which we define as adjusted EBITDA, less stock-based compensation, onetime acquisition-related expense, repayment of lease liabilities, purchase of property and equipment and software development costs, which reflects how much cash we are generating.

With that, I'd like to review our Q4 2020 results, followed by a review of our full year 2024 results. In the fourth quarter of 2024 as compared to the fourth quarter of 2023, total revenue increased by 1% to $10 million. SaaS revenue increased by 2% to $7.2 million. The increase in SaaS revenue is due to a combination of cross-selling and new customer revenue. BDC revenue decreased by 1% to $2.6 million. BDC revenue in Q4 of 2024, however, was the highest quarter of BDC revenue in 2024. SaaS gross margin remained consistent at 67%. BDC gross margin of 17% decreased by 5 points from 22%. The decrease in BDC gross margin is primarily due to new hires that are less productive through their training period. Quorum continues to work on multiple initiatives to reduce the BDC cost structure.

Overall gross margin remained consistent at $4.8 million or 48% compared to $4.8 million or 49%. Adjusted EBITDA decreased by 5% to $2 million or 20% margin compared to $2.1 million, a 21% margin, the year-over-year decrease for adjusted EBITDA is primarily due to the decrease in BDC gross margin. Cash EBITDA increased by 10% to $1.2 million or 12% margin compared to $1.1 million or 11% margin. For the full year 2024, as compared to the full year 2023, total revenue decreased by 1% to $40 million due to a decrease of $0.9 million in BDC revenue offset by an increase of $0.6 million in SaaS revenue. SaaS revenue increased by 2% to $28.8 million and was 72% of revenue for 2024 as compared to 70% for 2023.

BDC revenue decreased by 8% to $10 million and with 25% of revenue for 2024 as compared to 27% in 2023. The decrease, as mentioned earlier, was primarily due to staffing constraints. Gross margin increased by 3% to $19.8 million, primarily due to an increase in SaaS revenue as well as operational efficiencies for the SaaS and BDC cost structures as compared to 2023. Adjusted EBITDA increased by 18% to $8.3 million due to an increase in gross margin, a decrease in research and development expenses, sales and marketing expenses and general and administrative expenses. Adjusted EBITDA margin increased by 4 points to 21% from 17%. Cash EBITDA increased by 89% to $5.5 million due to the adjusted EBITDA improvements mentioned and lower software development costs. Cash EBITDA margin doubled from 7% to 14%.

As Maury mentioned, in 2024, Quorum also paid down $5.1 million against its BDC capital loan facility compared with $1.6 million paid down in 2023. This has reduced our BDC capital loan facility to $4 million at year-end 2024 from $9.1 million at year-end 2023. Quorum plans to pay down the BDC Capital cash flow loan balance of $1.2 million as of December 31, 2024, in full by the end of 2025. And we will continue to prepay 15% of the BDC capital mezzanine loan balance of $2.8 million at December 31, 2024, on an annual basis until maturity in August 2027. Note that paying more than 15% on an annual basis would result in significant penalties to Quorum. As of December 31, 2024, Quorum had net working capital of $3.2 million and cash and cash equivalents of $2.2 million and total debt to cash EBITDA of compared to 3.7x at December 31, 2023, and 6.4x at December 31, 2022.

With that, I'd like to pass it back to Maury.

[Maury Marks, executive]

Thank you, Marilyn. A total debt to cash EBITDA of 1x at the end of 2024 is impressive progress from 3.7x at the end of 2023. And I think this is even more impressive when you consider that our secured debt is 75% of our total debt. Our improved profitability and significantly reduced debt provides Quorum the latitude to make other future capital allocation decisions. We have multiple options, including, one, organic sales growth investments to pursue more new dealerships or logos in Canada and/or the U.S. market. Number two, inorganic growth through accretive acquisitions that add to our product suite and opportunities to improve our organic growth. And number three, other capital allocations such as normal course issuer bid to purchase back shares or pay payment of dividends.

What makes Quorum's capital allocation decisions more difficult are the newly introduced automotive tariffs in both the U.S. and then -- by both the U.S. and then the Canadian governments. What the tariff levels will be and which vehicles and parts will be tariffed is currently very fluid. On the current path of the government is following the tariffs will likely result in reductions in vehicle sales on both sides of the border and dealerships and OEMs will be challenged with raising prices or possibly losing market share and/or having their gross margins contract.

What we do know is that our dealerships are resilient and creative and we'll look for ways to improve sales and find gross margin improvements in their operations. Keep in mind that the fixed operations business, the service and parts business provides dealerships with a consistent and profitable revenue stream and is even more critical if the dealership customers are keeping their vehicles longer. In recent years, Quorum and our dealerships have had to navigate the initial and subsequent outbreak of COVID and the resulting vehicle and parts shortages post-COVID. We are confident in our ability to navigate the tariff headwinds. Having a broad product suite with products that help dealerships number one, driving more sales demand in the form of vehicle sales appointments and service appointments, number two, help dealerships with their closing percentages and number three, help them improve their gross margins on both vehicle sales deals and service appointment visits allows us Quorum to help dealerships meet the challenges that tariffs present.

I'd like to close our prepared remarks by sincerely expressing my appreciation to our employees whose commitment to Quorum was crucial to achieving our 2024 plan and strong quarterly and annual results. Their hard work is enhanced by our integrated suite of 13 essential software solutions and services. This product suite is fundamental to our profitable growth strategy as it facilitates product cross-selling and plays a vital role in driving the success of our dealerships, thereby increasing value for both Quorum and its customers.

Operator, I'd now like to open this conference call to any questions from our audience.

[Operator]

[Operator Instructions] Our first question will come from the line of Gavin Fairweather from Cormark.

[Gavin Fairweather, analyst]

Maybe just to start, you touched on kind of the volatile end markets and some of the uncertainty that we've been seeing. I'm just curious how your conversations with customers are going? Are you -- it sounds like you're leaning in both on the sales side and the service side in terms of new sales. How are those discussions going? And to what extent are you finding that you're still able to get deals across the line and the current uncertainty?

[Maury Marks, executive]

Yes. Yes. I mean, obviously, in conversations with dealers, dealers are just concerned about the environment. I guess we've been through this, as I mentioned in the prepared remarks, we've been through this multiple times together, whether it was COVID or the resulting vehicle and part shortages after COVID. So everybody is confident in our ability to navigate through the tariffs. But I think most of the concerns that I hear now are just people wanting clarity around what's going to be in place and what's not going to be in place, and it's the constant change that is probably the most difficult thing to sort of manage around.

In terms of what we're seeing in the market today, deals are still closing. And yes, so that piece is positive. And from our perspective, as you alluded to, we're positioning both our service offerings to help dealerships in their service and parts departments drive more customers in and improve their gross margins and our sales offerings, which obviously help them on the vehicle sales side, we're promoting both of those and dealerships seem quite receptive to both.

[Gavin Fairweather, analyst]

That's great to hear. And if I look back at your financials over the past couple of years, and obviously, a material step change in the profitability and cash flow coming out of the company with a relatively kind of consistent top line, I'd say. I mean, how are you thinking about kind of the path forward? Are you getting excited about driving some consolidated growth again? Or do you think that we can expect profitability to kind of push higher? How are you thinking about the financial priorities in the year ahead?

[Maury Marks, executive]

Yes. I think top line growth wise, I'd be reasonably optimistic right now if it weren't for tariffs, it's just so hard to predict. Right now, as I mentioned, right, we're finding that the deals are closing and dealers are still quite interested in our offering. So at this point in time, based on sort of how Q1 and Q2 have shaped up, we're fairly optimistic, but I just -- I don't know where the headwinds, the tariff headwinds will take us. So it's really hard for me to comment too much until we get more clarity on that side of things. And then profitability-wise, we've made a lot of improvements on, as you mentioned, on the profitability side of things. I think we're hitting sort of a reasonably consistent level and now finding additional ways to optimize in the business requires that we get more creative. And we will over time. But yes, I think it's sort of what you've seen from us in the past is how -- what we're sort of expecting going forward, but we're always looking for ways to optimize revenue growth and EBITDA margins.

[Gavin Fairweather, analyst]

Got it. And then next for me. Can you discuss the shift towards Q Cloud? I think that, that was kind of on the docket for later this year to try and move more of the base to a true kind of cloud posture. Can you just provide us with an update on your rollout plans there and how you're thinking about the ARPU lift and how that might manifest itself in the financials of Quorum as we see that transition taking place?

[Maury Marks, executive]

Yes. So Q Cloud has had its challenges. I got to tell you. We've got a team that worked on it and has been working on it for quite a period of time. I sit in twice a month on meetings on how we can continue to optimize it. But one of our challenges has been is that it's a new environment for us. So it's -- there's been a learning curve on our side. And there were technical challenges getting our software to perform as reliably and as quickly as we wanted. Now we've overcome, I would say a good 80% of the challenges. We still have a few remaining. And we've got a creative team working on it, and they're making lots of improvement. So hard for me to 100% predict what kind of impact it will have going forward. We do continue to move customers to our Q Cloud in general environment. But it's just -- we've slowed adoption until we are more confident in the environment.

[Gavin Fairweather, analyst]

Okay. And then lastly for me, maybe you can just touch on the M&A environment, whether you're seeing any movement in valuations? And what would be, I guess, the priority of the different point solutions dealership would purchase, which you don't have in the fold today?

[Maury Marks, executive]

Yes. So interesting enough, I mean, over the last few months, M&A activity and the number of deals we would have expose to has increased. Unfortunately, it's tough to justify doing a U.S. market acquisition, a U.S.-based acquisition right now. We've looked at a few and been pretty excited about some of the opportunities, but we just -- we need a little bit more clarity about where the current administration is going in the U.S. marketplace before we're willing to pursue those. So that's part 1 to your question.

Part 2 is, yes, I mean we're looking for probably a few different solutions that we've been fairly interested in. We've looked at solutions in the space of managing rental and fleet vehicles, look at solutions in the space of tire storage management. We looked at solutions in the in the category, not space but in the category of AI, both in the vehicle sales and service side. And we, of course, continue to build our own AI solutions as well, but we've also looked at other companies that have other unique takes on how to deploy AI into dealership. So I mean those are some of the more recent common categories that we looked at.

[Operator]

[Operator Instructions] I'm currently not showing any further questions at this time. I would now like to turn it back over to Maury for any closing remarks.

[Maury Marks, executive]

Well, I appreciate everybody's support and continued interest in Quorum. And thanks for attending our call today, and we will talk to you again in about 5 weeks when we release our Q1 results. Thanks, everybody.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.